The Future of German Automotive Industry - Is It Electric?

This story about the future of the German automotive industry, is about why we shouldn’t be complacent with our own success, and what happens when we become too comfortable to innovate. 

These problems may seem unique only to the automotive industry in Germany, when in fact, they are just as likely to be your problem or my problem. 

The story goes like this. 

PART 1: The Dark Horse, Tesla

In this video, the former Volkswagen CEO Matthias Müller and his colleagues were laughing at Tesla in a conference on stage, only 3 years ago in 2017. This makes me realize how much and how fast the world is changing. 

Fast forward to Sep 3, 2020, Matthias Müller is no longer with the company. Herbert Diess, the current president and chairman of the VW group, was very excited to welcome Elon Musk for a ride in VW’s ID3 in Germany. They later shared the video on twitter, seemingly using it for PR and marketing. In merely 3 years, it’s clear that Tesla is now the leader in the electric vehicle industry. 

A few days later on September 22, 2020, Tesla had a battery day when they unveiled the latest improvements in batteries, making the batteries smaller, cheaper and much more efficient. So much better that Tesla will be shipping affordable electric cars under 25,000 dollars in just a few years. Making electric cars affordable for everyone has always been the hardest thing, and it looks like Tesla, once a laughing stock of the German automotive industry, may be a front runner in this race, after all. 

However, On Sep 25, Volkswagen’s current CMO Jochen Sengpiehl still was quoted by the media that Tesla is just a niche brand for millionaires, which I can only interpret as a total misreading of the market. 

PART 2: Mistakes Germans Made

Besides the attitude, the Germans made a few other mistakes. 

The first mistake the German automakers made, was thinking that Tesla was just another car company without actual car manufacturing experience, when in fact, Tesla is a technology company tackling multifaceted issues such as renewable energy, energy storage, transportation, infrastructure, charging stations, artificial intelligence, to name a few. Tesla cars are computers on wheels. They will not need expensive annual repairs when compared to traditional cars with many parts and combustion engines. As Tesla vertically integrates everything from R&D to manufacturing the chip and the batteries themselves, they do not rely on 3rd party suppliers and can move to the market much more quickly. 

That is not the case for the German automotive manufacturers. 

Now, German automotive companies find it difficult juggling between having to allocate resources to produce traditional vehicles with combustion engines, as well as developing new electric vehicles models and perhaps autonomous driving all at the same time. The past success has become a baggage and they can not move fast. Many companies had chosen to be conservative and focus only on the traditional combustion engines, such as Audi’s CEO Markus Duesmann: he still wants to massively invest in combustion engines, because that’s still a cash cow that makes the balance sheet look nice. Although the margin is shrinking - it used to be 10%, and it’s expected to be 4% in 2020. 

Focusing on old technology will take Audi’s focus away from working on a new electric vehicle for tomorrow’s consumers.  

It’s not difficult to imagine that Audi could become an outdated brand because they are too focused on the past, and they’ll miss out on the future. 

The second mistake was made by the German government: Mutter, or Chancellor Merkel, had been over protecting her children.

Compared to other EU countries, Germany was not very proactive in building infrastructure or charging stations for electric vehicles. Germans love to hop in the car and drive hundreds of kilometers for weekend trips and they don’t want to be stranded on the road. Today’s electric vehicles, at least the more affordable models, can hardly go further than 80-100 miles, which is roughly about 120-160 kilometers. Besides not having enough charging facilities, charging stations also come with confusing plugs and standards - actually there is none - but that’s another problem for another video. 

Part 3: Over Reliant on China

Germany and China have been pretty good friends. It’s been a great partnership until recently and they each benefitted from the partnership. The German brands enjoy a certain prestige in China, and the German cars are very much sought after by the well-off Chinese middle class. They are hungry for anything luxurious and believe the best cars are German cars. 

Many did not notice that the tides are changing in the market. 

First came the change of the government policy. Beijing started telling people who want to buy cars with gasoline and diesel based engines, that they need to win an auction in order to get a new license plate, and the auctions make the license plates very expensive. The government does this as a way to deter people from buying traditional cars. 

Beijing made it much easier to buy electric cars, and is not shy to hand out incentives. Beijing plans to ban all sales of cars with combustion engines, by 2030. A very aggressive goal that’s quickly approaching. 

Becoming too dependent on China, is everyone’s problem right now, frankly. But basically, Germany woke up from a long nap to find themselves trapped in an impossible situation: Tesla is ahead of the game, the world’s changing tides, and the most scary thing of all, is that China, who had be learning German engineering from the Germans, now produces very decent electric vehicles, too. And on the top 10 most popular electric vehicles list, there was no German brand. 

I haven’t even touched on how Corona has disrupted the global supply chain, because you probably want me to shut my mouth about the problems already. 

But, long story short, German auto brands were very cool, now they found out they are not so hot any more, but they’re still kind of cute. So there is hope. I’m seeing the right conversations happening, as well as changing attitudes in Germany, so I want to applaud Germany for being woke. 

Red pill, or blue pill?